financial accounting chapter 3 homework solutions

Multiple Choice

Conservatism means that if there is uncertainty in a potential financial estimate, a company should err on the side of caution and report the most conservative amount. For the example, answers will vary. Sample answer: When I am budgeting for revenue in our household, I estimate what amount we will be paid, and I always round slightly down and with the expenses round up slightly so that there is a little leftover.

Assets = Liabilities + Equity; Revenues increase equity, while expenses decrease equity.

The general journal.

Decreasing cash decreases assets; decreasing accounts payable decreases liabilities. Assets (decrease) = Liabilities (decrease) + Equity (no change).

The combined total of liabilities and equity equals the total of assets because there is a claim against every asset that the company owns. Creditors have claims against some of the company’s assets, in the amount of the liabilities owed to them; owners (stockholders) have claims against all the rest of the company’s assets. Equity is the total of assets minus liabilities, which is sometimes referred to as net assets.

The total in accounts receivable will increase with a debit. We know this because accounts receivable is an asset account, and asset balances increase with debit entries.

A journal is a chronological listing of all of the recordable transactions that have occurred in a company.

Recognize means to make a journal entry.

It is a comprehensive listing for all accounts a company has and their balances.

T-accounts represent the changes made to the general ledger. They are used as an illustrative tool when planning or discussing the effects a particular transaction will have on the accounting records. T-accounts are used in academic and business situations, as they are easier to sketch out than general journals.

A prepaid account is an account that shows the balance of money we have paid in advance of an expense being incurred. Prepaid accounts are assets.

A T-account is a visual depiction of the activity in an account. Entries made on the left side of the T-account represent debits, while entries on the right side represent credits. The ending account balance is the total net combined debits and credits for that account.

Asset accounts, dividend accounts, and expense accounts are increased with a debit. (Also, contra-liability accounts, contra-equity accounts, and contra-revenue accounts are increased with a debit.)

Normal balance refers to the expected ending balance for an account, based on the way that the account balance increases (either debit or credit.)

The purpose of the trial balance is to recap the account balances, to ensure that debits equal credits. The trial balance is used to prepare the financial statements, in this order: Income Statement, Retained Earnings Statement, and Balance Sheet.

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• Authors: Mitchell Franklin, Patty Graybeal, Dixon Cooper
• Publisher/website: OpenStax
• Book title: Principles of Accounting, Volume 1: Financial Accounting
• Publication date: Apr 11, 2019
• Location: Houston, Texas
• Book URL: https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters
• Section URL: https://openstax.org/books/principles-financial-accounting/pages/chapter-3

© Jul 16, 2024 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.

• For educators

Financial Accounting (9th Edition) Edit edition This problem has been solved: Solutions for Chapter 3 …

Adjusting entries:

Adjusting entries refer to the entries passed prior to the issue of financial statements, to convert accounting records to the accrual basis of accounting. They are usually passed at the end of the accounting period.

The accrual basis of accounting states the revenues are to be recognized when they are earned and expenses are to be recognized when they are incurred.

Prepaid insurance:

Entities usually subscribe insurance to protect from losses against the risks. The insurance premium is usually paid for more than one accounting period. Therefore, the cash payment involves the expenses which are to be incurred for the further accounting periods.

Need of adjusting entry:

The entities should record the portion of cash payments which are yet to be incurred as prepaid insurance. The prepaid insurance is reported under current assets in the balance sheet.

Effect of the adjusting entry:

The income statement of the entity reports only the insurance expense incurred, that is insurance effecting the current accounting period. The balance sheet of the entity reports the prepaid expense as an asset, which is to offset the future liability.

The net revenue, total assets, and stockholders’ equity would be overstated if the entity does not record the adjusting entry. The expense will be understated if the entity does not record the adjusting entry.

Depreciation expense:

It refers to the portion of cost of asset which the company intends to allocate for the current accounting period. This is reported as an expense in the income statement.

The long lived assets provide benefits to the entity for more than one accounting periods. In accordance with the expense recognition principle, the entities should allocate the total cost over the life of the asses. Such allocation is done by charging depreciation expense to the income statement.

Accumulated depreciation :

It refers to the cumulative depreciation of an asset which is expensed till the current period. This is reported as a deduction from the cost of the asset.

The income statement of the entity reports only such portion of the cost of asset, which is used by the entity. Asset is reported in the balance sheet at cost and its book value is derived by deducting related accumulated depreciation.

The net revenue, total assets, and stockholders’ equity would be overstated if the entity does not record the depreciation expense. The depreciation expense will be understated if the entity does not record the depreciation expense.

Unearned service revenue:

This refers to the cash received by the entity before meeting the performance obligation. The entity should record the revenue only when it meets the performance obligation. Therefore, these receipts are considered as a liability till the entity meets the obligation.

The entity has to record the revenue on meeting the performance obligation. The revenue is considered as revenue earned when the customer avails the service in the accounting period. Therefore, the entity should record the revenue when the revenue is earned.

The income statement of the entity reports only the revenue which is earned. The balance sheet of the entity reports the liability for the cash received before meeting the performance obligation, which is offset when the revenue is earned.

The revenue and the net income are understated if the entity does not record the adjusting entry. The liabilities will be overstated and stockholders’ will be understated if the entity does not record the adjusting entry.

Interest payable:

Entities usually borrow funds by issuing debt securities and notes. These debt securities and notes carry interest obligation which is payable on a specific due date.

Entities should segregate the obligation on interest and principal. Therefore, interest expense should be charged to the income statement and a liability should be created for interest obligation.

The income statement and the liabilities are understated if the entity does not record the interest obligation through the adjusting entry. The net income and the stock holders’ equity are overstated if the entity does not record the interest obligation through the adjusting entry.

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